Indexation

Indexation is a tax provision that adjusts the original purchase price of an asset upward for inflation before computing the capital gain. By using the Cost Inflation Index (CII) to inflate the purchase price, indexation reduces the taxable capital gain — since a portion of what appears to be a "gain" is actually just compensation for inflation, not real wealth creation.

Without indexation, you pay tax on the full nominal gain (Sale Price − Purchase Price). With indexation, you pay tax on a smaller "real" gain (Sale Price − Indexed Purchase Price), because the purchase price is bumped up to reflect the purchasing power at the time of sale.

Indexation benefit was available on real estate, debt mutual funds, bonds, and other non-equity long-term assets. Budget 2024 removed it for debt funds (April 2023) and made it optional for real estate (with a lower tax rate as a trade-off).

Indexed Cost of Acquisition = Original Purchase Price × (CII of Year of Sale / CII of Year of Purchase)

LTCG with indexation = Sale Price − Indexed Cost of Acquisition − Transfer Expenses

Tax = LTCG × 20%

You bought a flat for ₹40,00,000 in FY 2014-15 (CII = 240). You sold it in FY 2024-25 (CII = 363) for ₹90,00,000.

Without indexation (12.5% rate):

• LTCG = ₹90,00,000 − ₹40,00,000 = ₹50,00,000
• Tax = ₹50,00,000 × 12.5% = ₹6,25,000

With indexation (20% rate):

• Indexed cost = ₹40,00,000 × (363 / 240) = ₹40,00,000 × 1.5125 = ₹60,50,000
• LTCG = ₹90,00,000 − ₹60,50,000 = ₹29,50,000
• Tax = ₹29,50,000 × 20% = ₹5,90,000

In this case, the 20% + indexation option saves ₹35,000 (₹6,25,000 vs ₹5,90,000). Use the LTCG calculator to compare both options for your specific property.

Note: For property purchased before 23 July 2024, you can choose the lower-tax option.

• Choose based on numbers, not convention: Always calculate both options (12.5% without indexation vs 20% with indexation) for pre-July 2024 property. For properties with large price appreciation relative to inflation, the 12.5% rate often wins. For properties in cities where prices barely outpaced inflation, indexation often wins.
• Debt funds: indexation gone since April 2023: From 1 April 2023, all gains on debt mutual funds are taxed at your slab rate regardless of holding period. The earlier benefit of LTCG + indexation at 20% after 3 years is no longer available for debt funds purchased after 31 March 2023.
• LTCG Section 54 exemption: If you sell a residential property and reinvest the capital gains in another residential property within 2 years (or construct within 3 years), you can claim exemption under Section 54 — entirely separate from indexation. Both mechanisms reduce LTCG tax on real estate.
• Compounding effect of long holding: The longer you hold a property, the more beneficial indexation becomes, because the CII ratio grows over time. A property held for 15 years benefits far more from indexation than one held for 3 years.
• Inflation rate vs CII rate: The CII is not simply CPI compounded — it is set by the government each year at a slightly different rate than actual CPI. Always use the official CII table from the Income Tax Department, not a CPI-based estimate.